Owner Financing vs. Lease-To-Own Purchase
We meet many buyers and sellers in St Petersburg and Tampa who are confused and don’t know the difference between the two. For your convenience The HOME Team provides the definitions and a brief explanation of the owner financing and lease-to-own terms, both for buyers and sellers.
A home-financing practice in which a buyer borrows from the seller instead of, or in addition to, a bank. Owner financing can also be called seller financing or purchase-money mortgage.
Seller financing is a good option for someone who can’t qualify for a bank loan. The reason one may not be able to get a loan is not necessarily bad credit, but could be simply a lack of credit. In other cases, the loan amount that the buyer CAN get is not sufficient to cover the purchase price, so the seller may finance a portion of the loan. Either situation presents some risk for the seller, so in most cases the interest rate will be higher than current market lender’s rate.
- No lender or bank qualifying necessary
- Flexibility in the terms of financing and down payment
- Typically seller financing requires a balloon payment of balance owned a few years down the road, 5-10 years out
- Once the deal is closed the buyer is the title/deed holder, in other words legal owner of the property
- Being the legal owner of the property it will be easier to get this property refinanced at the end of the owner financing term
WHAT IT MEANS FOR A SELLER
- Seller can receive a higher selling price and/or down payment with seller financing
- Seller is likely to get a higher financing rate than current market rate
- Beneficial for seller’s tax purposes as proceeds are paid out overtime rather than a lump sum
- Seller holds a mortgage and has a lean against the property for protection
- If a buyer defaults on making payments, the seller’s remedy is the foreclosure process
It is, essentially, a rental agreement that must be adhered to in order to have the opportunity to purchase the property at a future date at an agreed upon price.
WHAT IT MEANS FOR A BUYER
- No traditional qualifying
- Flexibility in terms of monthly rental payments, down payment (option fee) and the term of the lease or rent period
- For the person who has a less than perfect credit it provides an ability to show a verifiable track record of monthly payments
- The lease period is typically between 12-36 months
- If agreed by all parties, a portion of the monthly rent payment may be applied to the overall purchase price at closing
- Typically there will be an option consideration (option fee or down payment) that may be applied to the purchase price at closing
- These terms are negotiable by all parties
- At the end of the term when the buyer exercises their option to purchase, the buyer will be required to qualify for new financing
- If buyer fails to exercise the purchase option, they are at risk of losing the option fee and any rental credit that would’ve been applied to the purchase
- If the buyer defaults on the lease/rent portion of the lease option, the buyer can be evicted from the property with no recourse
- With the lease option the payment of the option fee give the buyer the right of possession and ownership without actually being the rightful title/deed holder
- Subleasing can create an income opportunity for the buyer
WHAT IT MEANS FOR A SELLER
- Typically higher selling price
- Possibly higher down payment
- Offsets tax liabilities over time
- If buyer defaults on monthly payments seller’s remedy is the eviction process
For total release of liability from the property seller should look into seller financing, because in seller financing they are giving up legal ownership. Both options can be financially beneficial for sellers and buyers. One should consider carefully all details of the transaction before signing the contract.
Tampa Bay Real Estate Blog by The HOME Team of Charles Rutenberg Realty, Inc.